Nelson v. Martin

• Decision Date: 24 November 1997
• Citation: 958 S.W.2d 643
• Parties: Carl NELSON, Plaintiff-Appellee, v. Harold Eugene MARTIN and Jack W. Gammon, Defendants-Appellants.
• Court: Tennessee Supreme Court

Page 643

958 S.W.2d 643

Carl NELSON, Plaintiff-Appellee, v. Harold Eugene MARTIN and Jack W. Gammon, Defendants-Appellants.

Supreme Court of Tennessee at Jackson.

Nov. 24, 1997.

Gavin M. Gentry, Memphis (Armstrong, Allen, Prewitt, Gentry, Johnson & Holmes, of counsel), for Plaintiff-Appellee.

Cecil McWhirter, Sally F. Barron, McWhirter & Wyatt, Memphis, Leo Bearman, Jr., Elizabeth E. Chance, Baker, Donelson, Bearman & Caldwell, Memphis, for Defendants-Appellants.

OPINION

REID, Judge.

This is a suit by a shareholder in a close corporation ¹ against the two remaining shareholders alleging the wrongful termination of his employment by the corporation and also his wrongful removal as an officer and a director. The case is before the Court on the defendants' motions to dismiss and their motions for summary judgment. The motions are sustained on all counts.

I

The facts essential to consideration of the motions are not disputed. Prior to the action on which the suit is based, the plaintiff, Carl Nelson, and the defendants, Harold E. Martin and Jack W. Gammon, were the only and equal shareholders in B & M Printing Company. The company, which was organized as a partnership in 1968 but subsequently converted into a corporation, was engaged in the commercial printing business. Nelson, Martin, and Gammon were officers and directors of the corporation and they also were full time employees. They received no compensation for their services as officers and directors but were paid salaries, commissions, and bonuses as employees. The parties also received rent from a building owned by them equally which was rented to the corporation. Originally, each shareholder served as president of the corporation for one year on a rotating basis. Upon the advice of a business consultant, that practice was discontinued and Martin had served as president for several years prior to the action which prompted this suit.

In March 1989, Nelson and Martin became involved in an acrimonious dispute regarding one of Nelson's customer accounts. Martin expressed concern that the account was not being properly serviced, which Nelson denied. Nelson admitted that he used highly offensive language towards Martin but contended that was not unusual or significant. As the result of the dispute, Martin, as president and without consultation with Gammon, gave Nelson written notice that his employment with the corporation was terminated immediately. Shortly thereafter, the board of directors on the votes of Martin and Gammon confirmed the termination of Nelson as an employee and also removed him as an officer and director of the corporation. There is no indication in the record that Martin and Gammon discussed the matter prior to the board meeting, which was attended by Nelson's attorney and proxy.

Nelson's annual compensation at the time his employment was terminated was in excess of $250,000.

Subsequently, Martin and Gammon leased a separate building owned by them to the corporation.

During the pendency of the suit, the parties voluntarily sold their shares in the corporation for a total of approximately $6 million, which amount they all agree was a fair price.

II

Nelson's suit seeking $6 million in compensatory damages and $12 million in punitive damages asserts four theories of liability--the defendants, "conspiring together and acting in their individual and personal capacities," maliciously induced the corporation to terminate his employment; the defendants interfered with the "plaintiff's prospective [economic] advantage;" the defendants wrongfully procured the breach of a contract of employment with the corporation in violation of Tenn.Code Ann. § 47-50-109; and the defendants breached a fiduciary duty owed the plaintiff.

On the defendants' motions that the complaint fails to state a cause of action, the trial court dismissed the claim that the defendants wrongfully interfered with a prospective economic advantage, and on the defendants' motions that the case presents no genuine issue of material fact, the trial court dismissed the remaining claims.

The Court of Appeals affirmed the dismissal of the first three claims but reversed summary judgment on the claim that the defendants violated a fiduciary duty owed to the plaintiff.

All issues are before the Court on appeal.

III

Nelson insists that the trial court and the Court of Appeals erred in dismissing his claim for wrongful interference with a prospective economic advantage. This claim is before the Court on the defendant's motions to dismiss for failure to state a claim on which relief can be granted. Tenn. R. Civ. P. 12.02(6). ² This claim has been asserted in this Court in two prior cases. In the first, Quality Auto Parts v. Bluff City Buick, 876 S.W.2d 818 (Tenn.1994), an employee accused of stealing from his company filed a counter-claim of intentional interference with prospective business relations alleging that the accusations were preventing him from obtaining employment. ³ The Court noted that although such a claim has been recognized as a cause of action in other jurisdictions, it has not been recognized nor rejected in Tennessee. The Court found that it was unnecessary to decide whether the claim is a cause of action in Tennessee because it, nevertheless, would "fail because [the] complaint does not allege two essential elements of the tort--(1) the existence of a specific prospective employment relationship and (2) knowledge by [the company] of such a relationship." Id. at 823. In the second case, Kultura, Inc. v. Southern Leasing Corp., 923 S.W.2d 536 (Tenn.1996), the issue concerned the liability of a company which had filed a financing statement and failed to timely file a termination statement. The Court noted that "intentional interference with prospective economic advantage has not been recognized as a cause of action in this state" but, again, found the issue to be moot because the plaintiff had failed to prove any damages. Id. at 540.

Since the legislature has not enacted a statutory cause of action for interference with a prospective economic advantage, the claim can be maintained only if it is found to be a part of the common law in this State. The tort of intentional interference with a prospective economic advantage is an extension of the principles establishing liability for interference with contract beyond the existing contractual relation to those relations which are "merely prospective or potential." See W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 130, at 1005 (5th ed. 1984). The action for interference with contract is based on society's need for stability in contractual relations. "The tort protects society's interest in preserving the formal integrity of contract and rests on an implicit appreciation of the fundamental structure-giving significance of contracts in a market economy." John Danforth, Tortious Interference with Contract: A Reassertion of Society's Interest in Commercial Stability and Contractual Integrity, 81 Colum. L.Rev. 1491, 1523 (1981). However, the policy reasons for the tort prohibiting interference with contracts, do not support a tort designed to protect prospective contracts and relationships. In Prosser, the tort for interference with a prospective economic advantage is described as "a rather broad and undefined tort in which no specific conduct is proscribed and in which liability turns on the purpose for which the defendant acts, with the indistinct notion that the purposes must be considered improper in some undefined way." Prosser, § 129 at 979. Danforth makes this further comparison:

[C]ontracts not only embody a bargained-for exchange, but also create a system of predictability in the commercial realm. By guaranteeing future performance, a contract may engender reliance and facilitate long-term planning by parties not directly involved with the contract itself. Whatever social value underlies tortious interference liability, therefore, is contingent upon just this: That the relationship disrupted involved an agreement to be bound to future performance....

... Prospective contracts, either existing relationships expected to mature into contracts or expectations of future advantageous relationships, do not involve an agreement to be bound to future performance. Interference with prospective contracts, therefore, does not threaten a societal interest in the formal integrity of contract, and should not be treated as a mere variant of interference with existing contracts.

Tortious Interference with Contract, 81 Colum. L.Rev. at 1515. "Extending the tort to protect prospective contracts [means] diffusing society's general interest in contractual stability and equating it with the aggregate self-interests of particular plaintiffs in the stability of their own contracts." Id. at 1517. See also Francis Bowes Sayre, Inducing Breach of Contract, 36 Harv. L.Rev. 663, 703 (1922-23). Such an extension is inconsistent with the principles of free competition in business relationships found in this state. As one South Carolina judge noted, such a cause of action would "greatly hamper free competition in the marketplace." Crandall Corp. v. Navistar Int'l Transp. Corp., 302 S.C. 265, 395 S.E.2d 179, 181 (1990) (Littlejohn, A.A.J., dissenting) ("I see the choice is clearly for that which promotes freedom of negotiation and competition in the marketplace, which is a cornerstone of our democratic society.") Other general criticisms of the tort of interference with contract are applicable as well:

[T]he tort has a highly detrimental effect on commerce and individual liberty. The tort hinders market efficiency, produces erroneous liability rulings, and fosters uncertainty in the law. The courts' interest-balancing approach to the tort is unworkable. Fundamental constitutional rights, including freedom of speech and due process, are impaired. Other rights necessary for a free society, such as freedom of thought, are...